Many people have some sort of special skill, hobby, or talent. However, the majority of us never look to utilize this to generate supplemental income. Don't leave money on the table. Reach your full income earning potential by turning your hobby into a side business.
So why do so many people fail to turn a hobby into a side business? In many cases this may be because doing so would involve unwanted hassle.
In others it could be the result of that particular skill having low marketable value. There is also a third possible situation that I currently find myself in. The challenge that I face is I’m not 100% sure how to get started.
Unsure How To Start Turning A Hobby Into A Side Business
For as long as I have had any money of my own, I have been passionate about exploring my investment options. I opened my first account with an online brokerage firm when I was 20 and have been buying and selling various securities ever since.
My career is also in finance. As a result, I often find myself in conversations with friends, family, or random people I meet discussing financial matters. It’s not uncommon that I hear questions such as:
I have some money in XYZ mutual fund; do you think this is a good investment?
I inherited some IBM stock from a relative a few years back, is this worth holding on to?
How much of my income should I be contributing to my various investment vehicles (e.g. 401K, Roth IRA, Traditional IRA, etc.), and what are the advantages of each?
It’s very apparent from talking to people that the average person in our society has a very low financial literacy. And, it is not usually any fault of their own, as many of them are actually incredibly bright people.
Finance simply isn’t a subject that people are taught a sufficient amount about as they are growing up. In case you don’t believe me, take the following chart from BlackRock as evidence:
My Challenge With Turning A Hobby Into A Side Business
Let me be clear, personal finance isn’t something that I want to do as a career. I already have a career that I am passionate about. I want this to be my hobby. But, I want it to go beyond the casual conversation at the bar or the brief phone call from an old friend. It would also be nice to earn some extra money while I’m at it. The main question marks for me are:
One of the larger obstacles for me is making sure that I’ve adequately researched everything ahead of time. I know a lot about wealth management. But, I don’t have much expertise regarding legal matters or small businesses.
Before I consider moving this beyond the idea phase, I need to be comfortable that I understand any legal risks. In addition, I need to consider any added taxes or fees that may be applicable based on the operating structure.
I’d also be curious to know what others have done or would recommend. Is getting started relatively easy? Would you recommend consulting someone who has experience working in this area? Are there many legal concerns?
Should I pursue a professional certification such as the CFP or CFA?
Another thing I’ve wondered about is whether potential clients tend to pay much attention to professional certifications and if they really understand what they are. I have a lot of formal education in finance and most of my leisure reading tends to be about different aspects of wealth management.
But, I’ve never looked strongly into getting one of the major professional certifications. I’m still not sure whether or not this would be worth it. Although part of me wants to do it just for the knowledge and the challenge.
Two of the most well recognized professional designations in finance are the Certified Financial Planner (CFP) and the Chartered Financial Analyst (CFA). Earning either designation requires a significant time investment (seemingly quite a bit more for the CFA) as well as many formal requirements like passing exams, meeting educational and work experience requirements, et cetera.
Based on observation, it seems to me that most people that work as personal financial advisors for large firms have the CFP designation but only a few have the CFA designation. Obviously both are well recognized, but the CFA seems to be more for individuals doing investment research and analysis, and less necessary for people working directly with individual investors.
With that said, how much value does earning one of these designations add for someone looking to do independent consulting, and is one preferred over the other? Further, do people that do financial advising on the side typically have these credentials or is that uncommon?
Is there anything else I should do to build my reputation and develop trust?
The relationship between a financial advisor and a client needs to involve a lot of trust. People work hard for their money and aren’t about to put it all at risk based on the advice of anybody. This is one of the reasons I think having a professional certification could make it easier to obtain new clients.
Everyone starting up also faces the disadvantage of being new. Even someone who offers great advice may still be adjusting to how to structure their meetings and how to not come across as inexperienced. I also face another possible disadvantage in being young.
It’s not necessary for someone to look at my resume to realize that my knowledge of “Black Monday” or the “Savings & Loan Crisis” isn’t first-hand. While there may be some value to having more years of experience, I’d like to think that as long as you come across as an expert in your area people won’t really care about your age and background.
I guess my main questions in this area would be:
For a smaller operation, is word of mouth advertising usually sufficient?
Is there anything I could do to enhance my image or reputation?
Closing Thoughts
As I’ve progressed in my career in finance, I’ve realized that a lot of my close friends who are in other fields (e.g. medical, tech, engineering, etc.) don’t know very much about basic personal finance. Sure they can seek out the advice of a professional, but my guess is that a lot of them will not, or they will end up overpaying for services if they do.
Especially for people who are relatively early in their careers, simple decisions about asset allocation can have a huge impact. The graph above shows how much $100,000 set aside can turn into under different assumptions for rate of return. Keep in mind that the average annualized return on the S&P 500 over the past 40 years is over 11%. For someone who is young, doesn’t mind short-term fluctuations, and can afford to take on some risk there are a lot of great opportunities out there. It’s sad that most people fail to realize it, because the difference can be huge (millions of dollars)!
While asset allocation is probably the biggest factor, people are incredibly lousy at stock picking too. People often fall for the “good company, good stock” fallacy, with the thought that “if I shop there and all my friends shop there, it must be a good investment”. The main problem is that the price of these companies is often very inflated because everyone else is seeing the same thing.
The chart below illustrates this fact by dividing all stocks into 25 groups based on their size group (market cap) and price group (market cap relative to book value). It’s clear that it’s actually the smaller stocks and the stocks with relatively low prices that have performed best historically. (This data is based on Fama and French’s 1996 paper in the Journal of Finance, using data covering 366 months)
The point is, I think most people would benefit from the services of a finance professional. People tend to be very willing to seek a doctor when we fall ill, a mechanic when our car breaks down, and a plumber when a pipe bursts.
Yet, there are many individuals who assure themselves that they can manage their finances on their own. That probably won’t change. But, I’m hoping I can help at least a few people out doing something that I enjoy.
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